Individual retirement account facts for kids
An individual retirement account or IRA is a form of "individual retirement plan". It is simply a savings account with large tax advantages. An IRA is not itself an investment. It is where an investor keeps assets such as stocks, bonds and mutual funds. A 401(k) is set up by an employer, but an IRA may be started by an individual. Other IRAs may be opened by small business owners and those who are self-employed.
Types of IRAs
There are different types of IRAs: Traditional IRAs, Roth IRAs, SEP-IRAs and SIMPLE IRAs. They vary as to tax filing status. Also they have different rules and conditions.
- Traditional IRA - Contributions to a traditional IRA are, depending on income, tax status and whether the taxpayer has a retirement plan sponsored by his or her employer. In both 2015 and 2016, a taxpayer can contribute to a traditional or Roth IRA up to $ 5,500. If over age 50, the contribution can be up to $ 6,500. Either amount can be reduced if the taxable compensation (wages for example) are less than limit set for the IRA contribution.
- Roth IRA - contributions to Roth IRAs are not tax deductible. The amount that can be contributed is usually the same as a Traditional IRA.
- SEP-IRA - Businesses of any size who want to set up an IRA for employees can use the SEP (Simplified Employee Pension Plan) IRA .
- SIMPLE IRA - A SIMPLE (Savings Incentive Match PLan for Employees) IRA is for employees and employers to set up an IRA. This is for small businesses that do not have a retirement plan.
Participant-directed accounts
A participant-directed account (also called a self-directed IRA) is an IRA which is provided by some financial institutions in the United States. It allows alternative investments for retirement savings. Some examples of such alternative investments are: real estate, private mortgages, private company stock, oil and gas limited partnerships, precious metals, horses, and intellectual property. There is a risk of fraud when investing in Self-Directed retirement accounts.
